Determination of 2010 Transmission Allowed Revenue and Use of System Tariffs

Transcription

1 Determination of 2010 Transmission Allowed Revenue and Use of System Tariffs DOCUMENT TYPE: REFERENCE: DATE PUBLISHED: QUERIES TO: Determination Paper CER/09/140 2 September 2009 Jamie Burke (jburke@cer.ie) The Commission for Energy Regulation, The Exchange, Belgard Square North, Tallaght, Dublin 24.

2 CER Information Page Abstract: This paper sets out the decision by the Commission on the electricity transmission business s ex-post allowed revenue for 2008, revised revenue for 2009 and ex-ante allowed revenue for The transmission revenue for 2010 is divided between revenue for the TSO and the TAO, EirGrid and ESB Networks respectively, and feeds into the transmission tariffs shown in Appendix A to this paper. Target Audience: This determination will be of interest to those who wish to understand the basis and extent of transmission revenue and tariffs from 1 st October This includes users of the transmission system, consisting of both generation and demand users connected directly to the transmission system or indirectly via the distribution system. Related Documents: 1. CER/09/141; Information Note on LEU Customer Credits 27 th August CER/09/117; Electricity Networks Tariffs Overview 27 th July CER/09/115: Proposed Determination of 2010 Transmission Allowed Revenue and Use of System Tariffs 27 th July CER/08/178; Determination of Transmission Allowed Revenue and Use of System Tariffs 26 th September CER/05/143; Transmission Price Control Review Decision Paper. 6. AIP/SEM/07/93; Decision to align PES tariffs in Northern Ireland and the Republic of Ireland. 7. CER/07/184; Determination of Transmission Allowed Revenue and Use of System Tariffs for th October CER/06/199; Commission s Determination of Transmission Allowed Revenue and Use of System Tariffs Paper 10 th October Explanatory Paper for the 2007/2008 Statement of Charges on EirGrid s website. 10. SEM All-Island Transmission Use of System Charging & Loss Factors 16 th January CER/08/131; Interim Electricity Price Increase 1 st August 2008.

3 For further information on this transmission revenue decision paper, please contact Jamie Burke at the CER as follows: Jamie Burke Analyst Electricity Transmission Commission for Energy Regulation The Exchange Belgard Square North Tallaght Dublin 24. Telephone: Fax: jburke@cer.ie 3

4 Executive Summary 1. Introduction This paper sets out a determination by the Commission on the electricity transmission business s ex-post allowed revenue for 2008, revised forecast revenue for 2009 and ex-ante allowed revenue for The transmission revenue for 2010 is divided between revenue for the TSO and the TAO, EirGrid and ESB Networks respectively, and feeds into the 2009/2010 transmission tariffs shown in Appendix A to this paper. All figures shown in this paper are in 2008 prices unless otherwise indicated. This paper follows a proposed determination on transmission revenues/tariffs published by the Commission on 27 th July (CER/09/115) for consultation, which included draft transmission use of system (TUoS) tariffs to apply for the tariff period from 1 st October 2009 to 30 th September The Commission issues this final determination on the allowed 2010 transmission revenue - and associated tariffs from 1 st October 2009 to 30 th September to the TSO and TAO, pursuant to Section 35 of the Electricity Regulation Act, Total Transmission Revenue for 2010 The Commission allows the following revenue for the transmission business in 2010, which is to be million in 2010 prices, as shown in the table below. This feeds into the transmission tariffs shown in Appendix A. m 2008 m 2010 prices prices TSO Revenue TAO Revenue Total 2010 Transmission Revenue Less 2008 Over-recovery Less 2009 Revised Forecast 5.83 Less 2009 re-profiled Transmission revenue 2.72 Total allowed Transmission Revenue for prices based on inflation of the 2008 prices by assumed rates of -4.6% in 2009 and 0% in

5 This represents a nominal decrease in the allowed transmission revenue between 2009 and 2010 of million or 8.3%, as below: Nominal Prices Transmission (TSO & TAO) Revenue 2009 m 2010 m Change m % Change % However it is expected that electricity consumption will fall over the period; it is estimated, for the transmission system, that this fall will be approximately 8% from previous estimates of consumption. Therefore, based on the above annual revenues and the estimated consumption, the average unit transmission tariff, for the period from 1 st October 2009 to 30 th September 2010, is estimated to be approximately 0.9 cent/kwh. In other words there is no significant change in the average unit transmission tariff. Overall the key reasons for the decrease in annual revenues between 2009 and 2010 are as follows: A lower than anticipated 2008 outturn cost for Ancillary Services from that which was allowed ex-ante combined with a lower than anticipated Ancillary Services cost forecast for 2009 and 2010; A repayment of 4.5 million of the depreciation and return associated with elements of non-network capex not expended up to 2010; Revised CPI and energy throughput figures for 2009 have led the Commission to re-profile the previously determined 2009 transmission revenue. This re-profiling has helped reduce the allowed 2010 transmission revenue by 2.72 million; The revised forecasts to the 2009 and 2010 TAO allowed revenues on account of the average underspends of Local Authority Rates, which has resulted in a reduction of 1.92 million in TAO allowed revenues in 2009 and 2.02 million in 2010; The Commission s decision to further reduce the 2010 transmission revenue by 5.94 million to reflect TAO capital underspends from 2006 to 2008; The Commission s decision to also reduce the 2010 transmission revenue by 3.82 million to reflect TAO underspend within the cost category Insurance and Compensations from 2006 to 2008; and Somewhat offsetting the above are lower than previously predicted energy throughput figures for 2010, which limits the change in the unit tariff. 5

6 3. Revenue Allowed in Price Control The following are the allowed revenues for 2009 and 2010 as determined in the 2006 to 2010 price control for the transmission business 2. Trans. Revenue 2004 prices, m Trans. Revenue Nominal prices 3, m 2009 m 2010 m Change m % Change % % The million nominal increase in transmission revenue from 2009 to 2010 allowed for in the price control, which is driven significantly by the 550 million transmission network investment programme, has been impacted on by subsequent adjustments made to the revenue and the adjustment to the 2010 revenue. The latter is summarised below and discussed in greater detail in this paper. 4. Ex-Post Allowed Revenue for 2008 This section summarises the transmission business s revenue for 2008 as previously allowed and the changes now made, on an ex-post basis. This is then compared with the actual revenue received from market participants, to calculate the total allowed transmission under or over-recovery of revenue for TSO Allowed Revenue for 2008 The TSO s previously allowed revenue for 2008 was million, compared with EirGrid s submitted actual outturn of million. Following its review of relevant TSO costs, the Commission has decided to allow the TSO revenue of million for 2008, shown in the table below and discussed in section 3 of the paper. 2 As per the Commission s Transmission Price Control Review Decision Paper (CER/05/143) published on 9th September Assumes inflation applied as follows: 2005: 2.5%, 2006: 4.0%, 2007: 4.9%, 2008: 4.1%, 2009:-4.6% and 2010: 0%. 4 Refer to the October 2008 Determination of Transmission Allowed Revenue and Use of System Tariffs for 2009 (CER/08/178). 6

7 m, 2008 Prices Ex-Ante Allowed 5 Revenue sought by TSO 2008 Revenue allowed by CER External Costs Ancillary Services Constraints Regulatory Levy Inter TSO Compensation Other (incl. DSO Wires ) Total External Costs Internal Costs Operating Costs Non Operating Depreciation EirGrid Once Off EirGrid On Going Operating Return on Assets Working Capital Promotion of Research Total Internal Costs Adjustments System Performance Incentives (2008) Adjustment allowed in Revenue Determination for '07 Cost Adjustment for EirGrid readiness costs for SEM Adjustment to Payroll Costs Arising from SEM Total Adjustments Total TSO Costs TAO Allowed Revenue for Having adjusted the TAO s RAB to take account of the opening asset base for 2006 and the underspend in Capital Expenditure by the TAO in 2006, 2007 and 5 As per the Commission s Transmission Price Control Review Decision Paper CER/05/143 as amended by the Commission s Determination of Transmission Allowed Revenue and Use of System Tariffs Paper, October 2007 CER 07/ prices based on inflation of 2.5% in 2005, 4.0% in 2006,4.9%in 2007, and 4.1% in

8 estimated , the TAO s allowed expenditure for 2008 is largely fixed under the price control and is adjusted annually ex-post only for pass-through costs such as Local Authority Rates. Following subsequent Commission decisions on the matters, there is also an adjustment for payment to the TAO by ESB Telecoms for the lease of fibre optic cables on high voltage lines, as well as for the TAO s allowed expenditure addressing the ESB pension deficit as also allowed by the Commission 7. The net impact of applying the adjustments is that the TAO s allowed revenue for 2008 is million, as shown in the following table Prices 2008 Ex-Ante Allowed in millions 2008 TAO Revenue allowed by CER in millions Total TAO Allowed Revenue after updated profile Shortfall in 2004 Underrecovery Additional Use of System Adjustment Adjustment for ESB Pension deficit Adjustment for Local Authority Rates TAO Revenue allowed for Total Allowed Revenue for 2008 The following table combines the ex-post allowed TSO and TAO revenues for 2008, compares this to the actual income received and shows an allowed overrecovery for the transmission business for 2008 of 0.11 million. This 0.11 million over-recovery will be used to reduce the 2010 allowed transmission revenue. 6 Please see 2009 Transmission revenue decision paper CER/08/178 published on 26 th September Please see 2007 Transmission revenue decision paper CER/07/184 published on 19 th October

9 Over-recovery for 2008 (in millions 2008 prices) Allowed Revenue Revenue received Overrecovery TSO Revenue TAO Revenue Minus Transmission under-recovery in Total Revenue Allowed Total Revenue Collected Over-recovery in TSO and TAO Revised Forecast Revenue for 2009 The Commission welcomes EirGrid s earlier proposal to review some components of the allowed 2009 TSO revenue at this juncture, in an attempt to keep tariffs as low as possible for the next tariff period, in view of the current Irish economic circumstances. This step will be taken now as opposed to waiting until the ex-post review in 2010, which would normally be the case. Based on this the Commission now deems it appropriate to provide for a revised forecast to the TSO allowed revenue for 2009 with respect to Ancillary Services to reflect the anticipated underspend of what was previously allowed ex-ante, as detailed in CER/08/178. This calculation is shown in the table below prices ( millions) Ancillary Services Ex-ante 2009 allowed CER revised allowed amount Difference between ex-ante allowed and current allowed Working with the TAO and in light of the current Irish economic circumstances, the Commission has reviewed one of the components of the allowed 2009 TAO revenue. The Commission provides for the pass-through of certain costs, which are deemed to be outside the control of the TAO, one of these being the Local Authority Rates. Upon review of the 2008 (CER/07/184) and 2009 (CER/08/178) revenue determinations and the 2010 submission made by the TAO, which provides the 2008 outturn figure, the Commission has noted that ex-ante allowed amounts for this particular cost-category have been over-estimated for the revenue years 2006, 2007 and now The Commission therefore has decided to take the average of the three years of over-estimation (2006 to 2008) for TAO local authority rates so as to provide for a 8 Please see CER/07/184 and section 3.5 of this paper 9

10 revised forecast to the TAO allowed revenue for The average underspend from 2006 to 2008 amounts to 2.02 million in 2008 prices ( 1.92 million in 2009 prices). The results of the revised 2009 TAO forecast (see table below) will, feed into the total ex-ante allowed 2010 transmission revenue prices ( millions) Ex-ante 2009 Allowed CER revised allowed Difference between ex-ante allowed and CER revised allowed Local Authority Rates The total 2009 revised forecast to be feed into the 2010 transmission revenue amounts to 5.59 million (i.e million million). 6. Total Over-recovery for 2008 and 2009 Applying interest to the transmission businesses combined allowed overrecovery for 2008 and revised forecast for 2009, results in a total over-recovery of 5.95 million (rounded) in 2010 prices. This sum is to be used to reduce the allowed transmission revenue for 2010, as shown below m, 2010 prices Over-recovery in 2008 with Interest 0.11 Forecast of Over-recovery in 2009 with Interest 5.83 Over-recovery to be allocated to 2010 (with interest) Re-profiled 2009 Transmission Revenue In a further effort to reduce transmission tariffs for the forthcoming tariff period the Commission has decided to take the step of re-profiling the allowed transmission revenue for 2009 (minus TSO and TAO external costs), previously decided upon last September in CER/08/178 rather than waiting until next year. This re-profiling will take account of updated CPI inflation figures and revised 2009 energy throughput figures, both of which are significantly changed due to the deteriorated economic situation. In CER/08/178 the Commission originally assumed an inflation figure of 3.4% for 2008 and 2.2% for , with an assumed energy throughput figure for 2009 of 28,759 GWh, in order to derive the 1 st October 2008 to 30 th September 2009 transmission tariffs. EirGrid has recently stated that total energy throughput at the trading point in 2008 was 27,844GWh. EirGrid now believes that a reasonable 9 Please see CER 08/178, Determination of Transmission Allowed Revenue and Use of System Tariffs for 2009, published 26 th September

11 energy throughput estimate at this point in time for 2009 is 4% below the 2008 outturn figure, which equates to 26,730 GWh. The Commission has now decided to apply the actual 2008 CPI figure of 4.1% 10, the assumed 2009 CPI inflation figure used in this paper of -4.6%, and the new 2009 energy throughput forecast of 26,730 GWh, to the ex-ante 2009 transmission allowed revenue decided upon in CER/08/178 (minus TSO and TAO external costs). The reason that TSO and TAO external costs, such as Ancillary Services and Local Authority Rates, are not included in this re-profiling is because they are pass-through actual costs and are not subject to fluctuations in indexation. Also, the Commission has already decided to allow revised forecasts for both Ancillary Services and TAO Local Authority Rates for Applying the updated inflation figures to the ex-ante 2009 transmission allowed revenue (minus TSO and TAO external costs) results in a reduction of million, in the 2009 revenue profiles as shown in the following table. Update re-profiling of 2009 Transmission CER/08/178 Revenue m 2009 prices 11 m 2009 prices 12 Total TSO Revenue Total TAO Revenue Total Revenue Allowed Less TSO External Costs Less TAO External Costs Less 2007 Over-recovery allocation Deduction relating to Capex Underspend Additional provision for tariff period extension Total TUoS Revenue Difference However, the revised energy throughput forecast for 2009 of 26,730 GWh means that energy throughput for the calendar year 2009 will be circa 7% less than that forecast at the time tariffs were set in The Commission therefore estimates that this is approximately 5% less for the 9 month period 1 st January 2009 to 30 th September 2009 (i.e. three-quarters of 7%). In conjunction with EirGrid, the Commission estimates that a 5% reduction in energy throughput for 2009 translates into a reduced transmission income of approximately 8.5 million, based on the mix of capacity versus energy and day versus night KWh rates Actual 2007 CPI of 4.9%, 3.4% in 2008 and 2.2% in Actual 2007 CPI of 4.9%, Actual 2008 CPI of 4.1% in 2008 and estimated CPI of -4.6% in

12 The net difference between the re-profiled revenues and the loss in income due to the reduction in energy throughput is 2.72 million ( million minus 8.5 million) as shown below. This 2.72 million will be used to reduce the allowed exante 2010 transmission revenue. Difference in Revenues in millions - Updated inflation for Difference in Revenues in millions - revised throughput of 26,730 GWh for Revenue to be re-profiled into 2010 in millions 2.72 The revised assumed inflation and energy throughput figures used in the reprofiling of allowed 2009 transmission revenue will be subject to final ex-post correction in It should be noted that in accordance with the Commission s Price Control decision paper (CER/05/143), TSO and TAO payroll costs are fixed annually from 2006 to 2010 and are subject only to inflation (or deflation as the case in 2009) in line with CPI. Therefore, based on the current best estimate for 2009, gross TSO and TAO allowed payroll costs are expected to decrease by the assumed 2009 deflation figure of 4.6%. The assumed 0% inflation figure for 2010 will also be applicable to TSO and TAO payroll costs in This decrease in TSO and TAO payroll costs is reflected in the transmission tariffs for 2009/2010 as detailed in Appendix A of this paper. 8. Ex-Ante Allowed Revenue for 2010 This section summarises the ex-ante allowed revenue for the transmission business for TSO Allowed Revenue for 2010 The TSO s previously allowed revenue provided for in the price control, and including adjustments made from 2006 to 2008 for 2010 was million, compared with EirGrid s recent submission of million and the amount now decided upon by the Commission of million. 12

13 m, 2008 Prices Ex-Ante Allowed Proposed by TSO 2010 Revenue Allowed by CER Ancillary Services Regulatory Levy Inter-TSO Compensation Other (includes DSO Wires Costs) Interconnector Services Constraint banking fees TSO External Costs Internal (capped) Costs Non Operating Depreciation Operating Return on Assets Working Capital EirGrid Ongoing Promotion of Research Operating Costs Adjustment for costs associated with EirGrid Readiness for SEM Adjustments to Payroll allowance post SEM Arm s Length Premises Cost Incremental Premises Separation Cost Sub Total Adjustments Total TSO Revenue TAO Allowed Revenue The TAO s allowed revenue for 2010 is provided for in the price control and, including adjustments, is set at million for When further adjustments are made including 2.02 million taken away for the reduced 2010 Local Authority Rates forecast, 5.94 million for capital expenditure underspend from 2006 to 2008 and a TAO estimated underspend of 3.82 million for Insurance and Compensation, the TAO s allowed revenue is million (rounded). 13

14 Ex-Ante Allowed million, 2008 Prices Total TAO Allowed Revenue after profile Less Capex underspend Less TAO Insurance and Compensations underspend Less adjustment to Local Authority Rates allowance Add adjustment for ESB Pension deficit 0.49 Add adjustment for Use of System by ESB Telecoms 0.77 TAO Revenue allowed for

15 Table of Contents Executive Summary Introduction The Commission for Energy Regulation Purpose of this Determination paper Comments Received Background Information Structure of this paper Application of Price Control Introduction Revenue for Revised Revenue for Revenue for Ex-Post Allowed Revenue for 2008 & Revenue Forecast for Overview of TSO Revenue for TSO s Costs and Revenues by Category External TSO Costs Internal TSO Costs Overview of TAO revenue for Combined TSO & TAO Ex-post Allowed for TSO and TAO Revised Forecast Revenue for Interest Provision for 2008 Over-Recovery and 2009 TSO/TAO Revised Forecast Re-profiled 2009 Transmission Revenue Ex-Ante Allowed 2010 Revenue Overview of TSO Revenue for External TSO costs Ancillary Services Internal TSO Costs Overview of TAO Revenue for Combined 2010 TSO & TAO Revenue Demand Side Management Rebates Appendix A Transmission Tariffs 2009/

16 1.0 Introduction 1.1 The Commission for Energy Regulation The Commission for Energy Regulation ( the Commission ) is the independent body responsible for overseeing the regulation of Ireland's electricity and gas sectors. The Commission was initially established and granted regulatory powers over the electricity market under the Electricity Regulation Act, The enactment of the Gas (Interim) (Regulation) Act, 2002 expanded the Commission s jurisdiction to include regulation of the natural gas market, while the Energy (Miscellaneous Provisions) Act 2006 granted the Commission additional powers in relation to gas and electricity safety. The Electricity Regulation Amendment (SEM) Act 2007 outlined the Commission s functions in relation to the Single Electricity Market (SEM) for the island of Ireland. This market is regulated by the Commission and the Northern Ireland Authority for Utility Regulation (NIAUR). The Commission is working to ensure that consumers benefit from regulation and the introduction of competition in the energy sector. 1.2 Purpose of this Determination paper This decision paper sets out the electricity transmission business s ex-post allowed revenue for 2008, the revised revenue forecast for 2009 and the ex-ante allowed revenue for The allowed 2010 revenue for the business feeds into the 2009/2010 transmission tariffs listed in Appendix A of this paper. The electricity transmission business consists of EirGrid, licensed as the Transmission System Operator (TSO) and ESB Networks, licensed as the Transmission Asset Owner (TAO). This paper follows a proposed determination on transmission revenues/tariffs published by the Commission on 27 th July (CER/09/115) for consultation, which included draft TUoS tariffs to apply for the tariff period from 1 st October 2009 to 30 th September Comments Received The Commission received two responses to the proposed determination paper (CER/09/115). The responses were from Airtricity and EirGrid. Comments received to CER/09/115 are now published and are summarised and responded to in this final determination of 2010 transmission revenue. Comments are also responded to by the Commission in the appropriate section. In addition, 16

17 comments made in relation to the LEU rebate scheme which is to apply for the tariff period 1 st October 2009 to 30 th September 2010 are also addressed in the Information Note on LEU Customer Credits, CER/09/ Summary of Comments Received The Commission s responses to specific comments are included in the appropriate sections. The following is a summary of the comments received. The response from Airtricity relates to section seven of CER/09/115 Rebates. Airtricity have queried the functioning of the Large Energy User (LEU) rebate scheme for the upcoming tariff period, 1 st October 2009 to 30 th September Comments from EirGrid are concerned with CPI indexation applied to transmission revenues, working capital allowances related to the TSO and administration of the rebate to LEUs for the upcoming 2009/2010 tariff period Response to General Comments General comments which do not apply to a specific section are responded to below. EirGrid have stated that an underlying CPI indexation currently applied to transmission revenues requires an ongoing real efficiency in their costs in order to be able to live within the allowable revenues. EirGrid argue that under the current regulatory model, and given the extent of the current deflationary environment, the TSO business faces significantly reduced revenues in both 2009 and Furthermore, given their cost structure is not fully aligned with the drivers of that deflation, the level of implied efficiency which will have to be achieved to operate within the revenue allowed will be greater than assumed when the control was set. The Commission has throughout the electricity price (PR2) control used CPI as the indexation value for transmission revenue. As stated in the 2009 revenue decision paper (CER/08/178) the Commission has previously considered as to whether it would be appropriate to switch to HICP or to continue with CPI, with the latter option being chosen. Looking ahead to the next electricity price control (PR3), the Commission would welcome any submissions from interested parties on the appropriateness of CPI being used as the indexation value for transmission revenue. 1.4 Background Information 17

18 A 5-year revenue control is in place for the TSO and TAO for 2006 to 2010, as set out in the Commission s determination of allowable revenues for the transmission business 13. Accordingly, most of the allowed expenditure for the business is not subject to annual review and is already predetermined for 5 years under this control. Pursuant to Statutory Instrument No. 445 of 2000, EirGrid is the statutory body licensed by the Commission to act as the operator of Ireland s electricity transmission system. The TSO s responsibilities include the operation, maintenance and development of Ireland s electricity transmission system in a safe, secure, reliable, economical and efficient manner. The body which previously undertook the TSO s functions prior to the establishment of EirGrid on 1 st July 2006 was ESB National Grid. ESB Networks is licensed by the Commission under this Statutory Instrument as the owner of Ireland s electricity transmission system. The TAO is required to maintain the transmission system and carry out construction work for its development in accordance with the TSO s development plan. The Commission issues this determination to the TSO and the TAO on their expost allowed revenues for 2008, revised revenue forecast for 2009 and ex-ante allowed revenue for All prices in this paper are in 2008 prices unless otherwise indicated. Any difference between the outturn transmission income for 2008 and revenues that are now allowed in this review, having reviewed the relevant actual costs incurred in 2008, will feed into the ex-ante allowed revenues for the TSO and TAO for Account has also been made in the ex-ante allowed revenue for 2010 of any revised forecast of allowed revenues for this calendar year, The transmission tariffs associated with the 2010 transmission business revenue will apply from 1 st October 2009 to 30 th September They consist of postalised demand tariffs and locational generator tariffs, which recoup 75% and 25% of the wires component of the allowed transmission revenue (the bulk of the revenue) respectively. All allowed non-wires costs, such as ancillary services, are recovered through demand tariffs. It should be noted that it is envisaged that generator tariffs will be harmonised in an all-island basis with Northern Ireland in the future please see SEM published by the Regulatory Authorities (the Commission and NIAUR) on 16 th January Attention is also drawn to the recent publication of SEM on the AIP website. This consultation paper from the System Operators presents a wide range of methodology options to be considered for the implementation of location signals (TUoS and TLAFs) on the island of Ireland. 13 Refer to Transmission Price Control Review Decision Paper CER 05/

19 1.5 Structure of this paper Sections 2 to 5 will outline the detail of the substantive issues of this decision paper; application of the price control, ex-post allowed revenue for 2008, the revised revenue forecast for 2009, the ex-ante allowed 2010 revenue for the TSO and TAO and the combined allowed revenue for the transmission business; Section 6 discusses the Demand Side Management scheme administered by EirGrid as TSO; and Section 7 discusses the LEUs rebate scheme. Appendix A details the transmission tariffs to apply from 1 st October 2009 to the 30 th September

20 2.0 Application of Price Control 2.1 Introduction On 9 th September 2005 the Commission set out its determination of allowable revenues for the transmission business for 2006 to 2010, for both the TSO and TAO 16. The following are the allowed revenues for 2009 and 2010 as determined in the 2006 to 2010 price control m 2010 m Change m % Change Transmission Revenue 2004 prices, m Transmission Revenue Nominal prices 17, m % % The 520 million transmission capital investment programme, designed to ensure that Ireland has adequate transmission infrastructure to meet its electricity demand and generation requirements, is a significant component of the million increase in transmission revenue from 2009 to However this revenue allowed for in the price control has been impacted on by subsequent adjustments made to the allowed revenue for 2009 which is already decided 18 and 2010 s allowed revenue. For example, constraint costs associated with the balancing of the transmission systems in the SEM are recovered by the SEMO since the introduction of the SEM and are no longer recovered through transmission tariffs. The adjustments to 2010 s allowed revenue are discussed in this paper. 2.2 Revenue for 2008 Much of the TSO s and most of the TAO s allowed expenditure for 2008 is fixed under the five-year price control and will not be subject to review when determining the allowed ex-post revenue for For the TSO, annual internal (controllable) costs such as payroll, professional fees, IT operating costs and facilities are fixed for the duration of the price control, whereas an annual adjustment to account for outturn costs will be made 16 Refer to: Transmission Price Control Review Decision Paper CER/05/ Assumes inflation applied as follows: 2005: 2.5%, 2006: 4.0%, 2007: 4.9%, 2008: 4.1%, 2009: -4.6% and 2010:0%. 18 Refer to Determination of Transmission Allowed Revenue and Use of System Tariffs for 2009 (CER 08/178) 20

21 for external (uncontrollable) costs such as ancillary services. Adjustments will also be made for changes in uncertain costs such as those associated with the vesting of EirGrid as a separate entity from ESB. For the TAO, the total annual costs are largely fixed for the duration of the price control except for certain costs which are treated as pass-through costs such as the TAO s Local Authority Rates and the Regulatory Levy. The Commission s ex-post allowed revenue for the transmission business in 2008 is discussed in detail in section 3 of this paper. 2.3 Revised Revenue for 2009 The Commission now deems it appropriate to allow for a revised forecast to the TSO allowed revenue for 2009 with respect to Ancillary Services to reflect the anticipated underspend of what was previously allowed ex-ante 19. The Commission has decided to allow for a revised forecast to the TAO allowed revenue for 2009 to reflect an anticipated underspend in Local Authority Rates. Thirdly, the Commission has also decided to re-profile the ex-ante allowed transmission revenue for 2009, which was decided upon last September in CER/08/178. This re-profiling will take account of updated CPI inflation figures and revised energy throughput figures, both of which are significantly changed due to the deteriorated national economic situation. The Commission s revised revenue forecast for the transmission business in 2009 is also discussed in detail in section 3 of this paper. The results of these revised forecasts for 2009, coupled with the ex-post review of the 2008 allowed revenue, will feed into the total ex-ante allowed 2010 transmission revenue. 2.4 Revenue for 2010 The five year price control also applies to the allowed revenues for 2010 in the same manner as 2008 and The Commission s ex-ante allowed revenue for the transmission business in 2010 is discussed in detail in section 4 of this paper. 19 As detailed in 2009 Transmission Determination paper CER 08/178, published 26th September

22 3.0 Ex-Post Allowed Revenue for 2008 & Revenue Forecast for Overview of TSO Revenue for 2008 The TSO s previously allowed revenue for 2008 was million, compared with EirGrid s submitted actual outturn of million. Following its review of relevant TSO costs, the Commission allows the TSO revenue of million for 2008, shown in Table 1 below. The main contributor to the reduced ex-post revenue for the TSO was outturn figures for Ancillary Services. Table 1: TSO Costs/Revenues, m, 2008 prices 20 Ex-Ante Allowed 2008 Revenue sought by the TSO 2008 Revenue allowed by CER TSO External Costs Internal Costs Adjustments Total TSO Revenue TSO s Costs and Revenues by Category This section provides a more detailed breakdown of the TSO s costs and revenues. It should be noted that the Commission s ex-ante determination of allowed transmission revenues for 2008, CER/07/184, allowed for the inclusion of new TSO costs in 2008 for which the TSO had requested revenue and which was different to the amount set out in the price control. These included uncertain cost categories which could not reasonably have been foreseen or quantified at the time of the price control review in 2005 and which now undergo an ex-post review in this paper. These costs are as follows: a) Adjustment for costs associated with EirGrid Readiness for SEM; b) Adjustment to Payroll Costs Arising from SEM c) Adjustments allowed in revenue determination for prices based on inflation of 2.5% in 2005, 4.0% in 2006, 4.9% in 2007 and 4.1% in 2008 ( 22

23 It was also stated in CER/07/184 that the TSO was expected to ensure that allowed additional uncertain costs, as discussed later in this section, would be incurred in an efficient manner. Table 2 below shows the detailed cost categories. The breakdown is divided into external costs and internal costs, as well as uncertain costs and adjustments. Following Table 2, there is a discussion of the costs and revenue categories. Table 2: TSO Costs for 2008, m, 2008 prices Ex-Ante Allowed 21 Revenue sought by TSO 2008 revenue allowed by CER External Costs Ancillary Services Constraints Regulatory Levy Inter TSO Compensation Other (including DSO Wires) Total External Costs Internal Costs Operating Costs Non Operating Depreciation EirGrid Once-Off EirGrid On Going Operating Return on Assets Working Capital Promotion of Research Total Internal Costs Adjustments System Performance Incentives Adjustment allowed in Revenue Determination for '07 Adjustment for EirGrid readiness costs for SEM Adjustment to Payroll Costs Arising from SEM Total Other Costs Total TSO Costs As per the Commission s Transmission Price Control Review Decision Paper CER/05/143 as amended by the Commission s Determination of Transmission Allowed Revenue and Use of System Tariffs Paper, CER 07/ prices based on inflation of 2.5% in 2005, 4.0% in 2006, 4.9% in 2007 and 4.1% in 2008 ( 23

24 3.2 External TSO Costs External costs are those costs which are to a large degree outside the TSO s control and are therefore particularly difficult to estimate in advance. An annual ex-post adjustment is made for external costs on receipt of outturn costs from the TSO. In total, the outturn external expenditure amounts to 38.5 million in 2008, 7.35 million less than that previously allowed. Each of the external categories is discussed separately below. Ancillary Services The allowed ancillary services comprise Operating Reserve, Reactive Power, Black Start, System Support and Interruptible Load. The outturn for ancillary services costs for 2008, at 35.9 million, is 8.33 million lower than the amount previously provided for. The lower outturn is due to the continued desire for a further black start facility in the East Coast region which has not yet been procured and a slower than anticipated take up by wind of ancillary services payments. The Commission continues to allow ancillary services as a pass-through cost for 2008 and therefore allows 35.9 million for Regulatory Levy In the price control the Commission allowed projected costs of 0.75 million per annum throughout the review period to cover the Commission regulatory levy. Due to increases in the regulatory levy, largely associated with Commission resources required for the SEM project, the regulatory levy was increased to 1.26 million for It was believed at the time of publication of CER/07/184 that extra resources for work on the implementation of the SEM would continue on into 2008; hence the increase in the regulatory levy amount 0.75 million to 1.26 for However, with the introduction of the SEM on 1 st November 2007 the regulatory levy has decreased for 2008 to 0.7 million. Therefore the allowed ex-post cost for the regulatory levy is 0.7 million. Inter-TSO compensation European Regulation 1228/2003, which took effect from 1 st July 2004, requires that TSOs are compensated for hosting cross-jurisdictional flows of electricity from those TSOs where the flows arise and where they end. A voluntary European ITC scheme, of which Ireland is a member, has been introduced and the outturn net contribution for the scheme for EirGrid for 2008 was 1.6 million. 24

25 The Commission allows this cost of 1.6 million. DSO Wires Costs The Commission allowed an ex-ante amount of 0.37 million for Other external costs for This category includes DSO Wires Costs, which relate to the cost paid by EirGrid to the DSO associated with the solitary 110kV connected customer that is classified as distribution rather than transmission due its location in the Dublin area. This is to prevent discrimination against this single customer. The TSO s actual cost for 2008 was 0.3 million. The Commission allows this cost. 3.3 Internal TSO Costs Operating Costs Operating Costs are those which are directly controllable by the management decisions of the TSO. The allowed revenue for operating costs for 2008 covers the following categories: Payroll; Professional Fees; Premises and Facilities Costs; Maintenance and Professional Fees; IT Operating Costs; and Business Overheads. The allowed revenue for internal operating costs for 2008 is set in the five-year price control and is not subject to review. The price control, as amended by the October 2007 Determination of Transmission Allowed Revenue (CER/07/184) allows million (2006 prices) for the above operating costs for When adjusted for inflation, the allowed revenue is million in 2008 prices. Non Operating Depreciation Non operating depreciation refers to EirGrid s non-network capital expenditure requirements, e.g. depreciation on its IT systems required for its transmission and market operation functions. The outturn for non operating depreciation for 2008 is 4.87 million. The Commission allows this cost of 4.87 million. EirGrid Once Off The establishment of EirGrid as a stand-alone entity on 1 st July 2006 gave rise to additional once-off or start-up costs. The once-off costs were primarily associated with recruitment for those vacancies for staff who did not transfer from ESB to 25

26 EirGrid, meeting any operational shortfalls with short-term contractors, and the media costs associated with the launch of EirGrid. The costs allowed for this are detailed in the October 2006 decision paper on transmission revenue (CER/06/199). The Commission allowed 1.44 million in respect of EirGrid once-off costs compared with 2.09 million sought by the TSO. The allowed costs of 1.44 million were apportioned over the four years from 2006 to 2009 with 0.17 million allowed for 2008 (in 2005 prices) 22. It was decided that this cost was not subject to annual review by the Commission. Accordingly, when adjusted for inflation the allowed revenue for EirGrid once-off costs is 0.19 million. The Commission allows this cost of 0.19 million. EirGrid Ongoing EirGrid ongoing costs are the costs associated with the ongoing and continued operation of EirGrid as a fully independent, stand-alone transmission system operator business following its establishment as a stand-alone business on 1 st July The ongoing costs that the TSO identified are associated with the new roles being taken on by EirGrid in particular the costs of the Client Engineer, managing the Infrastructure Agreement, managing the relationship with the TAO, managing media relations and additional corporate reporting and financial requirements appropriate to a stand-alone company. It was decided in CER/06/199 that this cost was not subject to annual review by the Commission. When adjusted for inflation the allowed revenue for EirGrid ongoing costs in 2008 is 2.51 million. The Commission allows this cost of 2.51 million. Operating Return on Assets The 2008 transmission revenue paper (CER/07/184) provides EirGrid with an operating return on its assets and investments of 1.1 million in 2006 prices, which is 1.2 million in 2008 prices. This operating return is the Weighted Average Cost of Capital (WACC) of 5.63% provided to EirGrid in the 2005 Price Control. EirGrid have submitted for an operating return of 1.09 million for 2008, 0.11 million lower than previously allowed for. This is due to a lower than expected spend on non-network assets since the start of this price review, which feeds into a lower operating return on these non-network assets (please see section 4.3 of the paper). The Commission allows this cost of 1.09 million for EirGrid. 22 Please see CER/06/199 published on the 10 th October

27 Working Capital The 2008 transmission revenue paper (CER/07/184) provides EirGrid with a working capital of 0.52 million to provide for EirGrid s internal efficiency and its short-term financial health. Under new working capital arrangements 23 EirGrid have submitted for an outturn cost of 1.45 million. The new working capital arrangements allow for a working capital provision of 20% of EirGrid s external costs under TUoS (excluding the TAO Charge) and 20% of its share (75%) of the imperfections charge forecast for the following tariff year at the rate of return of 5.63%. The Commission allows 1.45 million to EirGrid for working capital, which, as stated, includes 20% of its share (75%) of the imperfections charge for the tariff year 2007/2008. Promotion of Research In its October 2006 determination of transmission allowed revenue the Commission agreed to the provision of 0.3 million per annum to fund research and development, subject to certain conditions, as follows: compatibility with the two methods described in Section 9 the 1999 Electricity Regulation Act; applicability to solving existing or anticipated transmission-related problems, or potential to lead to both lower costs and a better level of service for network customers; and, it does not duplicate any similar research and development already funded by the Commission or carried out by entities regulated by the Commission. When adjusted for inflation the allowed revenue for the promotion of research is 0.34 million. The Commission allows this cost of 0.34 million for the TSO. System Performance Incentives (2008) The Commission s price control provides for the revenue incentivisation of the TSO for the continued improvement of transmission system performance and of the management of external costs. It should be noted that the areas of incentives for EirGrid for 2008 remained largely the same from 2006, i.e. ancillary services (excluding constraint costs), system minutes lost, system frequency and fault clearance rates. However, the targets for 2008, for the most part became more stringent. The maximum amount applicable to each category for 2008 was circa million, meaning that a maximum incentive of circa 0.95 million was available to EirGrid if it met all the performance incentives 24. The Commission has verified 23 Please see CER/08/ be1-b99d-efa0d186a3bb 27

28 the outturn figures for each of these incentivisation categories and these outturn figures are detailed in the EirGrid Transmission System Performance report EirGrid has reached its targets successfully in each category and therefore the Commission allows this 0.95 million adjustment to be added to the TSO revenue for Adjustments Allowed in 2007 Determination Adjustments were made in 2006 to the allowed TSO revenue for 2007 and subsequent years to account for the establishment of EirGrid on 1 st July 2006 in terms of the impact of the charges levied on the TSO for corporate centre /shared services costs by the ESB. These latter costs relate to the use by the TSO of ESB s office buildings and shared services such as light and heat, cleaning, facilities, security, mailing, switchboard and catering. Details of these costs and the Commission s determination are contained in the Determination of Transmission Allowed Revenue and Use of System Tariffs for 2007 (CER/06/199). EirGrid had submitted for costs of 1.87 million for costs in this category. The Commission allows this 1.87 million. Adjustment for Costs Associated with EirGrid Readiness for SEM EirGrid had requested revenue for 2008 associated with business Readiness Projects to support the all-island SEM. This was a new category for which no provision had been made in the price control. The objective of each of the Readiness Projects was to investigate and implement the required changes to processes, systems and staffing to allow EirGrid to perform its role as Transmission System Operator under the SEM. The EirGrid Readiness costs were reviewed and agreed by the Regulatory Authorities, the Commission and NIAUR. The agreed method of recovery of these costs was that all capital expenditure, staffing costs and consultancy costs incurred by the TSO due to the delivery of the agreed TSO Readiness Plan prior to the SEM go live date (1 st November 2007) would be capitalised and recovered after the go live date. On this basis, EirGrid readiness costs were to be depreciated over 5 years from January The TSO was therefore allowed in the October 2007 revenue determination paper CER/07/184, a depreciation charge and a return on assets for the capitalised costs over 5 years, starting in This resulted in a depreciation cost of 1.43 million for 2008 and a return on assets of 0.4 million based on the cost of capital of 5.63%. The total net additional revenue impact was therefore 1.76 million in 2006 prices or 1.92 million in 2008 prices. However, EirGrid submitted a 2008 outturn figure of 1.08 million, 0.84 million lower than the ex

29 ante allowed amount. This is due to outturn costs for SEM readiness being lower than those allocated in the EirGrid budget for this cost item. The Commission allows 1.08 million for this cost category. Adjustment to Payroll Costs Arising from SEM The introduction of the SEM resulted in a reduction or elimination of some existing functions undertaken by the TSO, the introduction of some new TSO functions and the extension of the scope of some existing TSO functions. A revenue adjustment for the TSO s allowed payroll was required in 2007 to reflect these changes. It was acknowledged by the Commission in the October 2007 revenue paper that there was some uncertainty in estimating those costs for 2008 on account of the new nature of the market. In CER/07/184 the Commission decided on a net reduction for the TSO s staffing in 2008 of 4.5 FTEs (full time equivalents), equivalent to a reduction of 0.52 million, ( 0.57 million in 2008 prices) in EirGrid s allowed payroll costs, on account of the introduction of the SEM. Therefore an ex-post review is now taking place with this paper and the Commission allows for a reduction of 0.57 million in EirGrid s allowed payroll costs. 3.4 Overview of TAO revenue for 2008 The TAO s allowed expenditure for 2008 is largely fixed under the 2006 to 2010 price control and is not subject to annual review when determining the allowed ex-post revenue for 2008 except for adjustments for pass-through costs and inflation. The price control has already been adjusted to take account of the outturn capital expenditure in 2005 and revised inflation forecasts. Accordingly, following adjustment of the opening asset base for 2006 based on the closing asset base at the end of 2005, and taking into account the revised inflation forecasts the allowed revenue for the TAO for 2008 is million (2008 prices) as shown in the table below. The basis for this figure is detailed in the October 2007 determination of transmission allowed revenue (CER/07/184) and is also outlined below. 29